Achieving a “lean” supply chain delivers significant benefits. However, to exploit the full opportunity it is necessary to first establish predictable performance. Without it your customers cannot rely on you. If they cannot rely on you they will be reluctant to engage in the collaborative activities thatprovide the highest levels of benefit to the lean organization. Furthermore, the level of benefit achieved from a lean environment depends on affecting processes that are both internal and external to your company.
In a recent briefing paper, Bob Parker of AMR1 Research stated “a lack of trust [between customer and supplier] equates to higher transaction costs.” He cites an example at GM where, for suppliers, the cost of doing business was twice that of Chrysler and 6 times higher than Toyota. This, he says, is directly related to a lack of trust on both sides.
The cost of an unpredictable supply chain
Higher working capital requirements
Excessive inventory write-offs/downs
Lost sales through extended delivery promises
GM is just one example of the extra cost associated with the untrustworthy supply chain. If predictability, or the lack of it is so costly, and predictability is the foundation for a lean supply chain then what are the benefits of “lean” ? Industry recognizes that the process of making supply chains lean yields, on average, between 5 and 7% overall improvement in operating performance: a very significant and sustainable gain that can be realised quickly.
Where are the costs in the unpredictable supply chain?
Without trust in your supplier or customer you will undoubtedly protect yourself from the uncertainty in the relationship. Invariably this means that companies will hold “safety” inventory (at multiple stages in the supply chain), order raw materials early, exaggerate the urgency of demand, use expensive “fasttrack” delivery methods or make extended delivery commitments. None of these are necessary or indeed effective.
How do you get from predictable to lean?
No matter how predictable, there will still be occasions that require responsiveness to unforeseen events, albeit that these circumstances should occur much less frequently once the supply chain is predictable. In such situations the operation needs to be agile, but not necessarily all the time, and notnecessarily at lowest cost. If you can meet customer needs under those circumstances then this further cements the relationship. There is then a very firm foundation from which to develop a lean environment that benefits both parties.
Start by measuring, managing andreducing the impact of uncertainty.
The performance of all companies is significantly affected by uncertainty. It comes from six sources: Supply, Demand, Cash, Behaviour, Capital, Markets An individual’s normal response to uncertainty is to hedge – a response that typically results in excess inventory holding or extended delivery commitments. In fact, hedging actually takes place at all the interfaces between business functions as each seeks to ensure that it serves its internal customers and meet its performance targets.
So the impact of uncertainty is amplified across the business. It’s a significant, and often hidden, cost burden that can be reduced – but how?
The answer lies in first being able to measure uncertainty so that you can then begin to address it. Use a pragmatic approach that measures the sensitivity that your operations have to uncertainty to provide you with an understanding of the impact that uncertainty has on your business. Use this then as the foundation for prioritising your scarce resources in order to manage better. That is, with insight into the causes of uncertainty you can focus your resources to best effect.
From the insight, begin to employ alternative responses: hedging is one of three possible responses to uncertainty. It is likely that other options can also be employed across the business to provide enhanced performance.
Furthermore, focus on the process: taking a process wide perspective may enable you to reduce the overall level of uncertainty, by encouraging functions to work in a more coordinated fashion. Such change is likely to impact the policy and process status quo, but is likely to yield substantial benefits in the short and long term.
In summary
The “lean” supply chain is predictable – consistently meeting commitments. It is agile – being able to respond when required. It does this at lowest cost or highest margin. You can’t be lean without being predictable and agile. Start by measuring your supply chain’s sensitivity to uncertainty, build strategies to manage and reduce that sensitivity. Develop agility where it is needed. When you do achieve lean, the benefits are huge.
1 AMR Research Alert May 22, 2003: “The Trustworthy Supply Chain”
Alan is a founder and director of Forward Solutions
(http://www.forward-solutions.com) – a management consultancy that helps
businesses with complex manufacturing options to achieve more lean and
predictable performance by reducing operational uncertainty. In 14 years
as a supply chain professional, working with companies from sectors
including chemicals, pharmaceuticals, consumer goods and hi-tech, Alan
has brought value to many organisations through the implementation of
enterprise wide solutions. He has worked with industry leaders
including: BP, Bridgestone-Firestone, Akzo Nobel, Mller, Wedgwood,
Motorola and Baxter Healthcare.
